The Fiscal 'Pop-n-Drop' for Equities -- Look Out

NEW YORK ( -- Today's gap higher in stocks has many investors feeling really good about the market. But will this rally last?

My to the point answer is "Yes," but there will be some bumps and navigating positions along the way.

Looking at the charts below you will notice how stocks are trading up over 4% in two trading sessions and several indicators and technical resistance levels are now being tested. Naturally when dealing with several resistance levels across multiple time frames, cycles and indicators we must be open to the idea that stocks could pause or pullback for a few days before continuing higher.

Here is a quick snapshot of charts I follow closely to help determine short-term overbought and oversold market conditions.

Momentum Extremes:

This chart helps me know when stocks are overbought or oversold. This trend can be followed using the 30- or 60-minute charts, helping you spot short-term tops and bottoms.

Stocks Trading Above 20-Day Moving Average:

This chart helps me time swing trades that last for one to three weeks. I use the daily chart to spot these reversals and trends.

Daily S&P 500 Index Chart:

This chart shows the big gap in price, test of upper Bollinger band, momentum and swing-trading cycles topping and 12 buyers to ever one seller on the NYSE, which tells me everyone is running to buy everything they can today and that is a contrarian signal.

Trading Conclusion:

This strong bounce which started on Monday from a very oversold market condition does look as though it has some power behind it. And over the next one to three days we could see prices grind higher until this momentum stalls out.

Once that happens we should see most of the gap filled. This will provide us with a lower entry price and reduce our downside risk for index, sector and commodity ETFs.

This type of bounce and momentum can lead to a running correction, which makes it impossible for traders to by on a dip. A running correction is when prices slow-chop higher in a narrow range for some time then explode higher continuing the rally. This is when you just need to jump in trades and chase prices higher but we will not do that until I see signs of a running correction.

Today many of the major market moving stocks are testing resistance, which means if they start to get sold the broad market will pullback with them.

Follow all my trades for 2013 on my Web site.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Chris Vermeulen is founder of the popular trading sites and There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.

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